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Czech mate
 In the market for capital gains, Stephen C Williams checks out Prague, one of Central Europe's proudest cities
Published in Square Foot Magazine on June 1 2007
The stunning capital of the Czech Republic has seen some good growth in recent years and is still regarded as one of the most well maintained historical centres of Central Europe. What's more, it is rapidly morphing into a hip, affluent business centre complete with yuppies, which candidly speaking, make up the staple diet of many a successful property investor.
Property prices have more than doubled in most areas - even taking into account a slight correction in 2005. In 2006, the market picked up an impressive 20 percent or more in some areas, due to the continual influx of foreign domestic investment.
This has led to lower unemployment rates (currently only 2 percent in Prague against the republic's 7 percent average), climbing salaries (consumers in the capital earn around 25 percent more than other Czechs) and greater consumer spending - especially in the service sectors.
While inflation levels are stable at 2 percent, last year's GDP of 6.1 percent is expected to hold this year. The local currency, the Koruna, has also strengthened against the Euro and the US dollar. And despite the current coalition not owning a majority in the house, change is unlikely and so the economy is expected to stay stable. All told, no matter which government is in power it is unlikely to have any negative impact on the local population, its lifestyle or its investments.
New VAT laws
 Currently, the VAT on new-builds is 5 percent, and the government has proposed to increase this to 19 percent on January 1, 2008. However, the latest industry word is that the proposed increase may not apply across the board. The new increases may only apply to those in the market for larger units - over 1,300 sq-ft for apartments and over 3,800 sq-ft for houses.
Since 90 percent of new-builds fall under this threshold anyway, most buyers will be unaffected. The few new-builds that come in slightly too large are now being modified. Those that are well over are likely to stay well over, and it's possible that these units may in fact generate better rental yields especially if targeted to the housing-packaged expatriate.
Czech developers claim they sell only 25 percent to investors, but without legal enforcement or regulation, this claim can often be as flexible as up to 50 percent of the number of units sold.
Rental yields
While gross yields of 6 percent can be achieved in Prague, this is not likely to last. Quantities of new-build homes are about to be completed and landlords will all be competing for the same pool of tenants.
For better growth potential Brno, the Czech Republic's second largest city might be a better option. Brno has seen a lot of activity in recent years, with developers buying up land lots in their droves, and waiting for prices to increase, before building. Gross rental yields are already 2-3 percent higher than those of Prague. And with many multinationals moving into this industrial town, taking advantage of the well-educated and low-paid workforce, prices are set to climb over the next few years, as they have done in Prague.
Investor friendly mortgages
The mortgage market is very well developed in the Czech Republic, but still represents a low contribution to the GDP as locals tend to make deposits of 50 percent up. Various mortgages packages are available however with the norm around 80 percent loan-to-value; some developer-backed incentives offer anywhere up to 100 percent.
No matter which mortgage plan you choose, your ability to service the payments without reliance on rental income will give you the edge in efficient property investment, as your year-on-year growth will outpace any rental income you are likely to receive. Look at the market to see where is the most growth likely (possibly Brno), assess mortgage products available, monitor how much your repayments are likely to be for the first few years, and be patient.
Alternatively weigh up a rental guarantee versus a discount on your purchase price should you need rental, or look for a longer build period should you be buying off plan.
If rental is key, your options may be limited to luxury-end developments or those situated along commuter-belts. The second-hand resell market might also be worth a look.
You could do a lot worse than invest in Prague or the upcoming hotspot Brno. This market is certainly primed for capital gains over the course of the next few years.
BYPASSING THE RED TAPE
Strictly speaking, investing in a property in Prague requires that you are a resident there. But many estate agents, developers and tax companies are happy to furnish you with a proof of address for a small fee. The major hurdle is setting up a limited company to purchase your property, but this normally costs no more than $25,000. If you are a UK national, you can apply for an EU Card, which costs roughly $5,000, then you don't need to set up a limited company to invest. |
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